What to Do With Your Tax Refund Money

Spring brings so many wonderful things – one of which is receiving your tax refund! But that brings questions, such as how to spend this money. While it may be tempting to indulge in a shopping spree, the best way to spend your tax refund probably lies elsewhere. Avoid the lure of instant gratification — a tax refund used wisely can set you up to be in a better position in the future. 

If you’re trying to decide what to do with your tax refund, here are some things to consider.

Tax Refund Dos and Don’ts

If you’re getting a windfall from the IRS, spend a little time thinking about what to do with it. Here’s how to make sure your money continues to work for you.

Let It Grow

Of course, saving is a great idea for any extra money that comes your way. But sticking it in an envelope inside your sock drawer isn’t the best way to do it. Sure, that money is in a (relatively) safe place, but it isn’t doing anything else for you.  One of the best ways to spend your tax refund is investing it in your retirement account.

Do: Talk with a financial advisor to find out what options you may have for maximizing your tax refund in a fund or account that will accrue interest. Many retirement savings fund options exist, including 401(k) funds, IRAs, mutual funds, annuities and more.

Plan Ahead

There’s nothing wrong with using your tax refund to purchase something. But an impulse buy is almost never the right choice. Instead of clicking “buy” on something cool you just saw, decide ahead of time where you’ll spend the money: on some valued time away, a large investment in your vehicle or home, a special event or even on a big-ticket item you couldn’t normally afford. 

Here’s another way of thinking about it: If you find yourself wondering what to buy with your tax refund, the best solution is to buy nothing. Set it aside until you’re able to think through your finances and plan something that makes sense.

Don’t: Spend it on extravagant impulse purchases. Flying to Vegas and catching a show sounds like a fun, impulsive weekend getaway. However, the impulse buy can sometimes cost you more in the long run. Going into more debt to go on vacation or to a fun event isn’t a good time in the long run. Splurging on a concert might be fun in the moment, but those VIP passes may not bring you the most bang for your buck. Figure out how you can budget your tax refund ahead of time and make smart choices.

Diversify Your Spend

Still not sure how to spend your tax refund? Use your refund to work on several financial goals. By looking at the big picture and thinking carefully about your financial future, you may uncover options for stretching those extra dollars.

Do: Consider splitting your tax refund between some of the following options.

• Putting some of the money toward a large purchase or upcoming expense, like an appliance or a wedding.
• Contributing to home renovations, which could improve the value of your home.
• Adding some to a retirement account like a Roth IRA, which will give the interest accrual process a little boost.
• Buying a life insurance policy that will help give you and your family added peace of mind.
• Paying off debt, starting with high-interest debt like credit cards.
• Building up your emergency fund.

Start Your Own Business

Dreaming of being your own boss? You don’t have to quit your current job to start your own business. Even part-time side gigs require a bit of investment, and a tax refund is a great way to fund your passion projects. Use your tax refund to build up inventory, design a website or online store, or anything else that allows you to turn a hobby into a money-making enterprise.

Don’t: Force the issue. If you don’t already have something you do on the side, this isn’t the time to come up with a project on a whim, especially since many new businesses fail at the start. It will be more fruitful to invest in something you already do. 

Invest in Your Skill Set

A tax refund may just provide the resources you need in order to level up your career. Maybe you like your job, but you want to be better at it, or you want to go for that big raise or promotion. If you're noticing that the jobs you want require skills or certifications that you don’t have, the refund check can go toward tuition for courses in those subjects. In fact, by taking advantage of the IRS’s Lifetime Learning Credit, you may be able to use the costs of the course to take money off your taxes again next year.

Do: Check the IRS website to be sure your courses qualify for the credit and your income falls within the range of eligibility. 

Plan for Your Financial Goals

Remember that there’s no hard and fast rule when it comes to spending your tax refund. It can be a fun bonus to your budget, but it could also help you get a little closer to your long-term goals — if you use it well. If you would like some ideas on how to create a plan to help you meet your financial goals, contact your Farm Bureau agent or advisor today for more information.